Enlarging the Varieties of Capitalism

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ENLARGING THE VARIETIES

OF CAPITALISMThe Emergence of Dependent MarketEconomies in East Central EuropeBy ANDREAS NLKE and ARJAN VLIEGENTHART*

INTRODUCTION

DURING the last few years, comparative typologies of capitalisms(comparative capitalism)1have become canonical among studentsof the political economy of Western societies.2This research field hasbeen pioneered by scholars such as Andrew Shonfield3and popular-ized by Michael Albert,4 and the landmark volume compiled by PeterHall and David Soskice5has both built upon and inspired many re-lated studies. The idea that the basic institutions of capitalism differfrom one country to another and that these differences are not acci-dental but linked to strong institutional complementarities, has led toa very sophisticated, holistic, and easily understandable picture of theinstitutional complexity of advanced capitalism. Many empirical stud-ies depart from the juxtaposition of liberal market economies (LMEs),typically represented by the U.S., and coordinated market economies(CMEs), typically represented by Germany.

* We thank seminar and conference participants at the San Diego International Studies AssociationConvention, the Darmstadt meeting of the German Political Science Association; Goethe UniversityFrankfurt; Max Planck Institute for the Study of Societies, Cologne; and Vrije Universiteit, Amster-dam, for comments. Reviews by Jan Drahokoupil, Bela Greskovits, Henk Overbeek, Bastiaan vanApeldoorn, James Perry, Laura Horn, and Angela Wigger have been most beneficial. We are also verygrateful for the detailed commentary of three anonymous reviewers. Helpful research assistance hasbeen provided by Brigitte Holden, Christian Mller, and Max Breuer. The contribution of AndreasNlke was supported by a research stay at the Max Planck Institute for the Study of Societies. Empiri-cal research has been made possible by a grant by the Dutch funding agency, NWO.

1Jackson and Deeg 2006.2Blyth 2003, 215.3Shonfield 1965.4Albert 1991.5Hall and Soskice 2001a.

World Politics61, no. 4 (October 2009), 670702Copyright 2009 Trustees of Princeton University10.1017/S0043887109990098


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ENLARGINGTHE VARIETIESOFCAPITALISM 671

6Whitley 1999, chp. 8; Bruszt 2002; McMenamin 2004, 269; Lane 2005, 245; Cernat 2006;Mykhnenko 2007; Bohle and Greskovits 2007a, 2007b; Hanck, Rhodes, and Thatcher 2007b; King2007; Drahokoupil 2009.

7Feldmann 2006, 830.8McMenamin 2004; Lane 2005.9Cernat 2002; Crowley 2005.10Palda 1997; Neumann and Egan 1999; Iankova 2002; King and Sznajder 2006; Mykhnenko

2007.

Given that the original varieties of capitalism (VOC) research programwas developed for analysis of the U.S., Japan, and Western Europe,scholars may wonder whether the approach is as useful for analysis ofcountries outside of this traditional core of the world economy. As casesfor an extension of the VOCframework, we have chosen the countries ofEast Central Europe (ECE), namely the Czech Republic, Hungary, Po-land, and the Slovak Republic. In these countries the period of transi-tion has come to an end and it is time to reflect on their position in the

wider context of global political economy. They are different from thecountries further to the east, such as Russia and the Ukraine, that haveexperienced a specific type of economic and political transformationand occupy a different position in the capitalist world economy. From acomparative political economy perspective, the Czech Republic, Hun-gary, Poland, and Slovakia are increasingly considered as four cases of

the same basic varietysharing very similar socioeconomic institutionswhile being distinct from, for example, the Baltic states, the Common-wealth of Independent States (CIS), Romania, or Slovenia.6

The VOCresearch program is currently quite popular within compara-tive political economy and it is no surprise that quite a few scholars havealready started to apply the VOCapproach to the economies of East Cen-tral Europe. After all, it was the collapse of real-existing socialism thatpaved the way for the ongoing explosion of research on inner-capitalistdiversity. This is not to say that prior to 1989 the question of what de-fines modern capitalism was neglected, but a large part of comparativeresearch focused on the differences between capitalism and socialism.7It is therefore not without irony that the VOCapproach has now entered

the former socialist area with much force. The outcomes of these ap-plications, however, are puzzling because they have led to somewhatcontradicting conclusions. While some studies claim a convergence ofEast Central Europe on the CME type,8others observe a convergenceon the LMEtype,9and a third group argues the rise of a bastard or hy-brid variety of capitalism that combines features of both types.10

These outcomes are not only confusing, but also challenge the ba-sic assumption of the VOCapproach that strong institutional comple-


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compared with the rather incoherent cocktail capitalism17of Roma-nia, becomes understandable.

Characterizing ECEcountries as DMEs not only clarifies the confu-sion noted above, but also helps to eliminate some pitfalls of the VOCapproach that have been noted in the literature.18First, it broadens theoriginal Hall and Soskice frameworks narrow focus on the U.S. and

Western Europe. Second, it overcomes the overly strict dualism of thisframework. Third, it incorporates transnational influencesin particu-lar the role of transnational companies (TNC)in an approach that tra-ditionally tends to consider socioeconomic systems as closed containersand contributes to an emerging literature on the interaction betweennational capitalisms and global production networks.19However, notall typical shortcomings of the VOCapproach can be addressed at thesame time. The most important omission in this article concerns the

domestic class struggles and transnational politics that have historicallyled to the emergence and transformation of specific economic institu-tions.20Since we cannot give a complete picture of the emergence ofECEcapitalism in these pages, our broad account needs to be comple-mented by more historically detailed and country-specific articles onthe domestic political origins of these institutions, including the role ofthe state, domestic bourgeoisies, and unions, and their interplay withmultinational corporations.21

Still, when compared with the existing literature, our extension ofthe varieties-of-capitalism approach leads to different policy conclu-sions. Against transitology studies from mainstream economics,22ourextension of the VOCapproach argues that there are different models

for economic success and that it would be futile to expect or to hopethat the ECEeconomies converge on the liberal model. Against moreorthodox Marxist analyses,23our approach highlights the existence ofa rather coherent segment within ECEeconomies that can successfullycompete in world markets for the time being, as long as inconsistentinstitutional frameworks are avoided. Thus, we see some potential fortaking the VOCapproach as a basis for the development of economicstrategies for emerging market countries. After all, the concerns of the

17Cernat 2006.18Phillips 2004, 12; Crouch 2005, chp. 2; Feldmann 2006, 83031; Jackson and Deeg 2006, 3739;

Bohle and Greskovits 2007a; Hanck, Rhodes, and Thatcher 2007b, 49; Drahokoupil 2009.19Lane 2008.20See Streeck and Yamamura 2001; Thelen 2004; Crouch 2005; on ECEsee Jacoby 2006; Drahok-

oupil 2008.21Drahokoupil 2009.22E.g., Balcerowicz 1993, 1995; Frydman et al . 1993.23E.g., Nesvetailova 2004; Raviv 2008.


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contemporary VOCdebate and important strands of development the-ory are strikingly similar.24But our analysis highlights some challengesfor the long-term future of these DMEs: their comparative advantagesare constantly being threatened by countries located further to the eastand will continue to remain limited to segments of their economies,thereby leading to increasing social and political tensions.

To support our argument, we briefly introduce the two basic mod-els put forward by the established VOCliterature. Next we apply thesemodels to the ECEcountries thereby demonstrating that they do not fiteither model, that they are not simply bastard combinations of the twobasic models, and that they form a distinct third model we call depen-dent market economy. We also provide an analysis of the institutionalcomplementarities within DMEs, based on the analytical categories ofthe VOCapproach, which explains the comparative advantages that these

countries currently enjoy. Our conclusion focuses on future perspectivesfor the sustainability of the DMEvariety of capitalism and for research.In addition, given that the main purpose of this article is conceptualdevelopment, we outline some options for a more systematic empiricaltest of our argument.

DEPENDENTMARKETECONOMIESASATHIRDVARIETYOFCAPITALISM

The most widely used and comprehensive comparative typology ofcapitalism is still the varieties-of-capitalism model developed by Halland Soskice.25Although there are a number of comparative capitalism

alternatives that propose a much larger number of types of capitalism,26

most authors still prefer to depart from the juxtaposition of CMEs andLMEs. Besides offering a rather balanced and comprehensive frame-

work, one of the most important advantages of this typology is its parsi-mony;27while the two basic models clearly are unable to give full justiceto the intricacies of, for example, British, French, or Italian capitalism,they still grasp the most important differences between the basic idealtypes of Anglo-Saxon and Rhenish economies. Moreover, not eventhe scholars that highlight the particular features of state-enhancedcapitalism in France or Italy would claim that these socioeconomicsystems entail a third type of coordination mechanisma necessary

24Phillips 2004, 1620.25Hall and Soskice 2001b.26E.g., Hollingsworth and Boyer 1997; Whitley 1999; Coates 2000; Amable 2003; Schmidt 2003.27Jackson and Deeg 2006, 3132; Hanck, Rhodes, and Thatcher 2007b, 16.


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precondition for a third basic variety of capitalism (see below); insteadthese economies are mostly described as in between or mimickingfeatures of CMEs and LMEs.28

The main theoretical task of the CME/LMEjuxtaposition is to explainthe marked differences in the comparative advantages of advanced cap-italist economies. These advantages are most easily demonstrated byfocusing on the different types of innovation processes that are centralto the two production systems.29 CMEs such as Germany or Austriaare assumed to have a premium on incremental innovation, whereasLMEs such as the U.S. and the U.K., in contrast, are supposed to focuson radical innovation. Of course, these patterns of specialization donot comprise the whole of the economy. Basic services, for example,are produced throughout all economies, but are hardly covered by anyof the VOCmodels.30Furthermore, it is problematic to equate a whole

industry with a certain specialization pattern in innovation given thatthere are more- and less-innovative activities within the same industryand that these can vary over time.31Correspondingly, the VOCmodelsare meant as broad ideal types.

The basic hypothesis of the varieties-of-capitalism approach is thatthe inherent institutional complementarities of the two different typesof market economies can explain these broadly conceived innovationpatterns. Each element of the two basic types has strong institutionalcomplementarities with other elements of the same model and differsclearly from its functional equivalent in the other model. Usually, fiveinterdependent elements can be highlighted:32the financial system (theprimary means to raise investments); corporate governance (the inter-

nal structure of the firm); the pattern of industrial relations; the educa-tion and training system; and the preferred mode for the transfer ofinnovations within the economy. More generally, the two models differ

with respect to the basic mechanisms available for the solution of coor-dination problems within national economies. In liberal market econo-mies, the most important forms of coordination are competitive marketarrangements and formal contracts. In coordinated market economies,nonmarket forms of coordination, such as interfirm networks and na-tional or sectoral associations, play a crucial role.33

28Schmidt 2003, 547; Della Salla 2004, 1045.29Hall and Soskice 2001, 3844.30Blyth 2003, 223.31Taylor 2004, 613; Crouch 2005, 31.32Hall and Soskice 2001b, 1733; see also Jackson and Deeg 2006, 1120.33Hall and Soskice 2001b, 8, 3336.


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Given the importance of a parsimonious scheme for the success ofthe Hall and Soskice model, new varieties should not be added withouthesitation. In order to qualify as a distinct variety of capitalism, threeconditions have to be met:34 (1) the existence of an alternative over-all economic coordination mechanism closely related to (2) a relativelystable set of institutions based on marked institutional complementari-ties, that leads to (3) a set of specific comparative advantages (in rela-tionship to CMEand LME) and a superior economic performance overcomparable, but less pure, socioeconomic systems. We address each ofthese conditions in turn to demonstrate that we can identify a third ba-sic variety of capitalism that is emerging in ECE, although it is perhapsstill too early to judge the long-term stability of this variety and its abil-ity to provide an equal alternative to CMEsand LMEs.

The common denominator of the third variety is the fundamental

dependence of theECE

economies on investment decisions by trans-national corporations. Though we accept that the CME and the LMEmodels are embedded in the global economy, we will demonstrate thatthe DMEs arein both quantitative as well as qualitative termsmoredeeply dependent on foreign capital than any of the core CMEs andLMEs. We baptized the third variety dependent market economy be-cause it is similar to the label liberal dependent post-communist capi-talism coined by Lawrence King;35it was inspired by earlier works ondependent development in Latin America.36

The point of departure for our argument is a recent literature on therelationship between transnational corporations and capitalist variety.37

The main conclusion derived from this literature is that TNCs tend to

look for a combination of low labor costs and the acquisition of tacitknowledge embedded in local industrial districts.38As we demonstratebelow, it is a combination of relatively low labor costs and a skilledpopulation with substantial knowledge of a medium level of technologythat constitutes the comparative advantage of the DMEmodel. Similarto previous studies on the origin of economic institutions,39we high-light the crucial importance of an extraordinary crisis for the emer-gence of new socioeconomic institutionsin this case, the collapse ofcommunism. TNCs always strive to create an institutional setup con-ducive to their needs. The political situation in ECEwas uniquely well

34We owe this point to two anonymous reviewers.35King 2007, 309.36

Evans 1979.37E.g., Morgan and Kristensen 2006, 2007.38Morgan and Whitley 2003, 610.39Streeck and Yamamura 2001; Hpner 2005, 343.


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suited for a full-blown institutional design geared towards the prefer-ences of these corporations, given the absence in the region after 1989of strong domestic bourgeoisies that could resist such a development.40

The ideology of the leading political class fostered the development ofan economic system that catered to the interests of TNCs as this classadhered to economic policies that spurred economic restructuring andeconomic growth through foreign investments.41Correspondingly, weidentify the hierarchy within transnational corporations as the centralcoordination mechanism in DMEs,42in contrast to competitive marketsand formal contracts as the central coordination mechanism in LMEs, orinterfirm networks and associations having that role in CMEs (see Table1). The notion of hierarchy not only complements markets and net-

works as the classical coordination mechanisms of modern societies,43but it is also closely linked to the complementarities between the most

important socioeconomic institutions within theDME

variety. Follow-ing earlier works in the VOCtradition,44we take corporate governance(specifically the hierarchical control by TNCheadquarters) as our focalpoint and demonstrate its complementarities with the other four majorinstitutions identified within the VOCframework.

First and most obvious are the complementarities between corporategovernance and the primary means for rising investment within DMEs.Given the extremely huge volumes of FDI, TNCs prefer to hierarchi-cally control local subsidiaries from their headquarters as an alternativemode of finance and governance rather than to accept financing byinternational capital markets and outsider control by dispersed share-holders (LME), or to accept financing by domestic bank lending as well

as retained earnings and insider control by networks of concentratedshareholders (CME).Second is the close relationship between the corporate governance

institutionsthe primary means of raising investmentsand the sys-tem of industrial relations. On one side, TNCs need low labor costs forthe DMEmodel to work well and therefore will not accept costly insti-tutions such as comprehensive collective agreements or cumbersomeprocedures for layoffs. Given the heavy competition for FDI,TNCs are inan excellent position to bargain on these issues. On the other side, theintegration of corporate decision making into transnational commodity

40Eyal, Selnyi, and Townsley 1998.41Drahokoupil 2008; Vliegenthart and Overbeek 2007.42

For a remarkably similar concept see the notion of Hierarchical Market Economy (HME) ascoined by Schneider 2008.43Thompson, et al. 1991.44E.g., Hall and Gingrich 2004; Hpner 2005.


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chains leads to TNCinterest in keeping workers in the distinct subsid-iaries fairly satisfied. Widespread labor unrest would not only hinderthe functioning of the distinct subsidiary, but might also have an effecton other parts of the commodity chain. We assume that the positionof the subsidiaries is not so rooted within the national societies as torequire a general arrangement with regard to labor issues. As a result,rather selective company-level agreements should dominate; ones thatallow for catering to the needs of TNCs and create stable relationshipsbetween management and labor within the individual firm.

Third, we expect to observe an intrinsic interconnection betweenthe education system, the system of corporate governance, the primarymeans for investment, and the innovation system. Given that FDIintothis variety of capitalism pays off with rather low labor costs as well as

with considerable tax breaks, TNCs will not be in favor of a generous

public education system or of their own substantial investment intotheir labor force. In addition, they do not see the need to invest heavilyinto innovation-relevant skills, given that they prefer to transfer in-novations into the region from abroad (see below). Furthermore, thestrongly individualized system of company-level industrial relations inthe DMEas well as a system of corporate governance strongly gearedtoward the corporate hierarchies of individual TNCs would hardly al-low for the introduction of a CME-style system of vocational traininginstitutions, given that effective training institutions require national(or at least sectoral) coordination within interfirm networks and as-sociations.

Fourth,TNCs prefer to keep the most innovation-heavy activities

at their headquarters or to acquire them via takeovers (LMEs) or jointventures with other companies in their country and sector (CMEs). De-pendent market economies are expected to be used as assembly plat-forms based on innovations that are made at TNC headquarters andtransferred within TNChierarchies. This again entails complementa-rities between the DMEinstitutions. Investment financing by FDI andhierarchical control by TNCheadquarters allow for the transfer of in-novations to DMEs without the risk of the intellectual-property-rightsproblems associated with joint ventures, for example. Moreover, giventhe limited amount of innovative activity, there is no need for an LME-type system of general-skill education combined with massive researchand development (R and D) expenditures, or for a CME-type system

of comprehensive vocational training. The same applies for industrialrelations; TNCs do not need highly flexible labor markets to acquire


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innovations (as in LMEs) or long-term investment into skill acquisitionbased on inflexible labor contracts (as in CMEs). DMEs work particularly

well with a medium level of labor-market flexibility; TNCs retain theability to adjust employment levels to demand in order to avoid toomuch labor-market fluidity for their skilled staff and avert a breakdownof their assembly platforms.

Taken together, the complementarities outlined above should giverise to a specific type of comparative advantage that is not based onradical innovation (LMEs) or incremental innovation (CMEs), but ratheron an assembly platform for semistandardized industrial goods. Whilethe highly innovative parts of the business cycle remain at TNChead-quarters, fully developed technologies are transferred to the TNCs sub-sidiaries in the DMEs and remain under the control of the corporatehierarchy. At the same time, based on extremely favorable conditions

forFDI

(for example, tax breaks financed by low public expenditures),moderate labor costs, and a fairly skilled workforce, the region can suc-cessfully compete in the global market for this kind of investment.

EASTCENTRALEUROPE: THEDME MODELINPRACTICE

Our modification of the VOC conceptual framework identifies as thecentral coordination mechanism within these economies a number ofinstitutional complementarities that are centered on the multinationalenterprise core principle of intrafirm hierarchy. In this section we take acloser look at the five institutional components introduced by Hall andSoskice and further develop our idea that a third variety of capitalism

is emerging in ECE. We demonstrate the complementarities betweenthese institutions, as well as their mutual reliance on the hierarchicalcoordination within transnational enterprises, by using empirical datafrom the ECEregion. However, with regard to the specialization patternin CMEand LMEas discussed above, our construction of the DMEmodelcovers only the dominant industries within the region and cannot rep-resent East Central Europeaneconomies as a whole.

PRIMARYMEANSOFRAISINGINVESTMENTS

In our view, the decisive impact of foreign capital in the restructuringof the former socialist economies symbolizes the primary characteristicof the emerging DME variety.45The dependency on foreign capital is

best illustrated by a look at the way in which investments are financed.45See also King 2007.


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In the case of ECE, the primary source of investment is foreign directinvestment (see Table 2), not the stock market (as in LMEs) or domesticcredit (as in CMEs). FDIis concentrated in complex industries and ECEcountries clearly have more of these than other transition economiessuch as the Baltic states and the CIS.46

Although FDIdoes play a role in the CMEand LMEmodels, the de-gree of external dependency is much more extreme in ECE. This is bestdemonstrated by an examination of the relationship between inwardand outward FDIstock (see Table 3). While the relationship is fairly

balanced in both CMEs and LMEs, DMEs are heavy importers of capital.46Bohle and Greskovits 2007a.

TABLE1

THREEVARIETIESOFCAPITALISM

Institution

Liberal MarketEconomy(LME)

Coordinated MarketEconomy(CME)

Dependent MarketEconomy(DME)

Distinctivecoordinationmechanism

competitive marketsand formalcontracts

interfirm networksand associations

dependence onintrafirm hierarchies

within transnationalenterprises

Primary meansof raisinginvestments

domestic andinternationalcapital markets

domestic banklending andinternallygenerated funds

foreign directinvestments andforeign-ownedbanks

Corporategovernance

outsider control/dispersedshareholders

insider control/concentratedshareholders

control by headquartersof transnationalenterprises

Industrial relations pluralist, marketbased; fewcollectiveagreements

corporatist, consen-sual; sector-wideor even nationalagreements

appeasement of skilledlabor; company-level collectiveagreements

Education andtraining system

general skills, highresearch anddevelopmentexpenditures

company- orindustry-specificskills, vocationaltraining

limited expendituresfor furtherqualification

Transfer ofinnovations

based on markets andformal contracts

important role of jointventures and busi-ness associations

intrafirm transferwithin transnationalenterprise

Comparativeadvantages

radical innovation intechnology andservice sectors

incrementalinnovation ofcapital goods

assembly platforms forsemistandardizedindustrial goods


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Another indicator of the importance of foreign capital to ECEcoun-tries is the measure, by sector, of their exports. In industries in whichthe ECEstates have clear comparative advantages, such as automobiles,manufacturing, and electronics,47foreign ownership clearly dominates

(see Table 4). In the banking sector, which affects the distribution ofcapital within an economy (particularly for small- and medium-scaledenterprises), foreign ownership is also omnipresent.

Taken together, these data about the origin of the primary meansfor raising investments demonstrate the external dependency of theECEeconomies. Foreign direct investment is by far the most importantsource of capital. Domestic bank lending, the second most importantsource of finance, is also clearly dominated by transnational companies.

When compared with ownership relationships in Western Europe, theheavy penetration of the ECEbanking sector by FDIis obvious. At theend of 2004 the market shares of foreign branches and subsidiaries inthe Euro area amounted to a mere 15.5 percent; the figure was well

over 70 percent in ECEeconomies.48While ECEeconomies include large47Rugraff 2006.48Raviv 2008, 16870; see also King 2007, 310.

TABLE2

SOURCESOFBUSINESSFINANCE

Country

Stock MarketCapitalization

(Percentage of GDP)

Domestic Credit toPrivate Sector

(Percentage of GDP)Inward FDIstock

(Percentage of GDP)

DME

Czech Republic 31.0 33 48.0Hungary 29.5 46 51.8Poland 30.1 28 24.9Slovak Republic 25.0 31 31.5

LME

U.K. 138.9 156 37.8U.S. 136.9 249 12.7

CME

Austria 41.3 106 22.7Germany 43.7 112 16.4

SOURCES: United National Conference on Trade and Development (UNCTAD);World InvestmentReport 2007 for inward FDIstock; World Development Indicators for stock market capitalization anddomestic credit data for 2005 (Foreign Stock and Market Capitalization) and 2004 (Domestic Credit).


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TNCs as well as mid and small domestic companies, these companiesalso depend on foreign financing.49We can thus safely conclude thatthe most fundamental financing decisions are not made in the regionitself, but in Western Europe and the U.S.

CORPORATEGOVERNANCE

The relationship between management and owners constitutes thecentral part of any corporate governance system. In most of the lit-erature on corporate governance, ECEcountries are considered to be

hybrids of CMEs and LMEs.50

We argue, however, that this assessment issuperficially based on an analogy that looks only at formal governancestructures such as two-tier boards. We suggest linking corporate gov-ernance to the specific ownership pattern of the region. Many largercorporations have been taken over by foreign investors. Especially inHungary, but also in the other ECEstates, privatization has led to a hostof foreign takeovers of formerly state-owned corporations.

As a result, with regard to the institutional setup and its dependencyon foreign investments, the East Central European DMEmodel is dif-ferent from the CMEand LMEmodels. Foreign ownership leads to im-portant changes in the internal corporate-governance structure withinECEenterprises; major corporate decisions are not negotiated between

managers and shareholders, but rather between managers of the ECE49We owe this point to an anonymous reviewer.50Iankova 2002; Neumann and Egan 1999, 175; Palda 1997, 93.

TABLE3

RATIOINWARDFDI STOCK/OUTWARDFDI STOCK

Country 2006

DME

Czech Republic 15.3Hungary 6.4Poland 9.7Slovak Republic 23.6

LME

U.K. 0.8

CME

Austria 1.0Germany 0.5

SOURCE:UNCTAD.


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subsidiary and Western headquarters. TNCs have fully integrated theCEE[Central and East European] subsidiaries into their company net-

works.51As a result, corporate managers of ECEsubsidiaries are respon-sible to internal supervisors in other countries. Foreign companieshave applied tight budgetsexercised close control on managerial deci-sions and relied heavily on their appointees to the board of directors.52In general, we perceive a strong institutional complementarity betweenan ownership structure that is dominated by foreign direct investmentsand a corporate governance structure that demonstrates close supervi-sion of local managers by Western-based headquarters. This contrastsboth the LMEmodel, in which there is an active market of corporatecontrol based on financial markets to supervise management, and theCME model, where managers primarily have to deal with holders oflarge blocks of stock and domestic banks that provide funding as pre-ferred partners (so-called Hausbanken).

To some extent these observations are also valid for subsidiaries inWestern Europe and the U.S., but in East Central European coun-tries the process is more marked. Corporate governance in ECEis moretransnationalized than in the core of the world economy. TNCs play adecisive role in total growth as domestically owned small- and medi-um-scale enterprises (SMEs) are often dependent on foreign partners insupplier-driven and buyer-driven supply chains.53As a result, corporatestrategies adopted in foreign headquarters have a decisive impact on the

whole economy of the region, which reflects the dependent position ofthe ECEcountries discussed earlier. Thus, these investments have anambivalent character, as indicated by the case of a German paper mul-tinational: This firm integrates the Polish economy with the Western

51Radosevic 2003, 33.52Czaban and Henderson 2003, 182; see also Holman 2002, 414.53Radosevic 2003, 33.

TABLE4

SHAREOFFOREIGNOWNERSHIPINTHREESTRATEGICSECTORS

Country Automotive Manufacturing Electronics Banking Czech Republic 93.1 52.6 74.8 85.8Hungary 93.2 60.3 92.2 90.7Poland 90.8 45.2 70.3 70.9Slovak Republic 97.3 68.5 79.0 95.6

SOURCE:Data for 2004, based on OECD.stat database, measured as a percentage of turnover;banking data for 2002 based on Mr and Valentiny 2003.


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European ones, while simultaneously making it dependent on the deci-sion of a firm with operations in many countries, making investmentdecisions with its global empire, not Polands development, in mind.54

Finally, the corporate-governance regulatory framework first intro-duced in the early 1990s has been highly influenced by the processof EU enlargement. In this process, the EU has laid out the kind ofcorporate-governance reforms needed in order to acquire EU member-ship. As a result, corporate-governance practices as well as corporate-governance regulations are not pure endogenous products, but havebeen strongly influenced by transnational agents.55

INDUSTRIALRELATIONS

Regarding labor relations, ECEeconomies do not resemble either themarket-based Anglo-Saxon or highly cooperative Rhineland models,

but constitute a variety in their own right. Again, a study that looksonly at quantitative data and formal institutions might classify the re-gion as a hybrid. In general terms, East Central European collectivebargaining coverage rates are higher than in the Anglo-Saxon world,but lower than in the Rhineland states (see Table 5).

Indeed, unlike the Anglo-Saxon model, ECEcountries do not havea culture of hiring and firing, nor do they have a corporatist structurein which organized labor is incorporated into a complex system of bar-gaining procedures and enjoys real power in the struggle over wagesand collective agreements on the sector level. The position of labor inDMEs is substantially weaker than in CMEs, given the heavy competi-tion for foreign direct investment and the lingering threat of compa-

nies being relocated further east. Correspondingly, transnational com-panies will not accept factors such as high wages, high union density,comprehensive collective agreements, powerful worker representationor cumbersome procedures for layoffs. Given that the incorporationof DMEs as assembly platforms in complex global commodity chainsmakes strikes very costly, as soon as TNCs invest heavily within theregion they become interested in keeping workers fairly satisfied.56Atthe same time, these TNCs cannot easily replace their skilled labor andthey cannot avoid worker defection by simply paying higher wages, do-ing so would cause them to lose the cost advantage of that workforce.

Thus, they avoid the rather fluid relationship with workers that can beobserved in LMEs, and generally strive for an appeasement of workers

54King and Sznajder 2006, 781.55Vliegenthart 2009.56Greskovits 2005, 12122.


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in terms of work conditions. A typical phenomenon is the existence ofcompany-level agreements, which make up 80 percent of all collectivebargains in ECE,in contrast to Western Europe where most agreementsare made at the sectoral or even national level.57

In this respect, ECEstates can be characterized as countries with in-complete social pacts,58 a characterization that is also represented inpublic social spending. ECEwelfare arrangements are not as compre-hensive as those of CMEstates, but theECEgovernments spend more on

welfare than do their counterparts in LMEstates (see Table 5). In ECEindustrial relations and social spending systems are not built on broad-based social struggles, but rather are instituted to selectively appeasetransnationational corporateemployees. The issue of worker represen-tation on supervisory boards poses another example of the incompletesystem of employee involvement within ECEindustrial relations; suchrepresentation is officially part of the institutional setup in countries,but in practice only half-heartedly implemented.59

57Crowley 2004, 406.58Bohle and Greskovits 2006; Meardi 2007.59Vliegenthart 2008.

TABLE5

INDUSTRIALRELATIONSANDSOCIALSPENDING

Country

CollectiveBargaining Rate

(Percentage ofEntire Working

Population)Dominant Level

of Bargaining

Union Density(Percentage of

Entire WorkingPopulation)

Public SocialSpending

(Percentage ofGDP)

DME

Czech Republic 27.5 firm 27.0 21.1Hungary 40.0 firm 19.9 22.7Poland 40.0 firm 14.7 22.9Slovak Republic 40.0 sectoral/ firm 36.1 17.3

LME

U.K. 32.1 firm 29.2 16.2U.S. 13.1 n.a. 12.8 20.6

CME

Austria 98.5 sectoral 35.7 26.1Germany 70 sectoral 23.5 27.3

SOURCES:Collective bargaining rates for 2002, Visser 2004; dominant level of bargaining, EuropeanCommission Union Density for 2001, Visser 2004; social spending for 2003, OECD.stat.


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If the system of industrial relations is linked with the primary meansto raise investments and the system of corporate governance, given thedominant interest of Western owners to keep labor costs low and tosafeguard the smooth working of tightly integrated commodity chains,strong institutional complementarities can again be identified. Whilethis preference is well served by company-level collective agreements,sectoral or even national agreements are hardly viable because coordi-nation between the owners of local businessessituated in a number of

various Western capitalsis difficult to generate. In contrast, sectoral-or national-level agreements are fairly typical for CMEcountries wherethe existence of a strong domestic bourgeoisie heavily reduces the cor-responding transaction costs. At the same time, the increasing scarcityof skilled labor in ECEcountries(examined in the next section) wouldmake an LMEsystemwith its high reliance on fluid labor markets and

individual contractsvery costly if disruptions of complex commoditychains are to be prevented.

EDUCATIONANDTRAININGSYSTEMS

When turning to education and training systems, ECE can again bedistinguished from the countries that manifest the LMEor CMEvariet-ies of capitalism. The 1990s saw substantial cutbacks in governmentspending on education60and a decentralization of the responsibility foreducation.61Between 1995 and 2000, government spending on educa-tion was reduced from 5.5 percent to 5.2 percent in Poland, from 5.4percent to 4.9 percent in Hungary, and in the Czech Republic from 4.9percent to 4.4 percent of the GDP.62At the same time the basics of the

socialist educational system, with its focus on vocational training, sur-vived but its orientation radically changed. As K. Roberts63points out,one of the key elements of the postsocialist education system is that

vocational training is structured to meet the labor demands of TNCs.Spending on and structuring the vocational system then, in turn, shapethe rest of the educational system.

In this respect, it is important to stress that employers usually areunwilling to bear the additional costs of on-the-job training of inexpe-rienced young workers.64It seems that most employers do not find itrewarding to invest heavily in their own workforce.65The DMEmodel

60Commandor and Kollo 2008.61Barrow 1998.62Feldmann 2004, 278.63Roberts 2001.64Nesporova 2002, 12.65Bohle and Greskovits 2006, 15.


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differs from the CMEmodel in the sense that in it, public vocationaltraining, largely outside of corporations, dominates the system; notmuch vocational training occurs at the workplace. At the same time,the withdrawal of governmental involvement no longer allows for astrong public education system that counterbalances limited vocationaltraining with a high quality general-skills education along Anglo-Sax-on lines. ECEgovernments find it difficult to invest heavily in publiceducationa major precondition for a comprehensive general-skillseducationgiven the fiscal constraints that go hand in hand with theintense competition for FDI,frequently including massive tax-reductionpackages.66

All in all, the postsocialist educational system fits neatly with ourinterpretation that the economies of ECEcountries belong to a third va-riety of capitalism and that this third variety is primarily characterized

by its external dependency. Whereas demanding tasks such as researchand development are executed in the CMEs and LMEs of the core regionsof Western Europe, the DMEs of East Central Europe are used as as-sembly platforms for semistandardized goods. For these purposes, exist-ing vocational skills are largely adequate; major investment to upgraderequired skills would endanger ECEs cost advantages and would be dif-ficult to organize, given the firm-centered system of industrial relations

within DMEs. In addition, given the specific corporate-governance andfinance systems of DMEs, it hardly comes as a surprise that there arefew activities that counter the slowly eroding comparative advantage ofthese economieswhich probably goes hand in hand with low levels ofspending on education and training. Whereas nationally owned busi-

nesses would be concerned about these long-term developments andmight coordinate for reverse action, Western headquarters do not caremuch about these tendencies, given their potential to relocate produc-tion in the long term if local skill levels deteriorate too much.

INNOVATIONSYSTEMS

Similarly, for tasks such as assembly platforms for semistandardizedgoods, major investments in Rand Dare not necessary and too costly.Decisions regarding research and development are not dominated byconcerns about the long-term innovation potential of local economies,but rather by their current profitability within a transnational company.

The tendency not to invest into the valorization of the production pro-

cess is reflected in the total spending on research and development,66Bohle and Greskovits 2006, 2021.


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which falls way below the figures of Western Europe and the U.S. (seeTable 6).

The level of spending on research and development is not the onlything that sets dependent market economies (negatively) apart fromthe other varieties; the organization of the innovation system withinthem differs considerably from those within LMEs (where innovationsare transferred via the market) and CMEs (where innovations are spreadby diverse means of business cooperation). In the case of DMEs, mostR and D is done outside the region and then imported into the pro-duction process through transnational networks that bind together thedifferent places of production. Foreign corporations often import newtechnologies into the region and do their Rand Dand design elsewherein the world because they consider ECEeconomies as a place for pro-duction and not for research.67The consequence for local companies

withinDME

s has been nicely summarized by Ott Sink, president ofVideoton, a leading Hungarian company: Downsize radically, stop de-veloping new products, and focus on labor-intensive manufacturing toserve a hungry crop of multinational investors.68Modern technologyis transferred to ECEeconomies under the strict control of TNChead-quarters, something enabled by the externally dominated corporate-governance patterns described above. Correspondingly, more than 70percent of Rand Dexpenditure in Hungary is provided for by foreign-controlled firms.69As a further consequence, there has been an increas-ing shift from joint ventures to majority foreign ownershipthe latteraccounting for 40 percent of FDIin Poland in 1993, 45 percent in 1995,50 percent in 1998,70 and even 100 percent ownership in the tech-

nologically most demanding activities71

thereby indicating a strongcomplementarity between innovation systems and the control over themeans of investment. Still, technology transfer should not be underes-timated, since it has allowed for the modernization of ECEproductionfacilities and thus supported the regions current competitive advantage

within global capitalism. ECEeconomies have been able to attain a rela-tive degree of economic success72without massive investment in theirown education systems due to a disproportionate amount of foreigndirect investment.

67For an excellent account of these tendencies in the clothing industry see Pickles et al. 2006.68Quoted after Bohle and Greskovits 2006, 13.69

King 2007, 312.70King and Sznajder 2006, 778.71Greskovits 2005, 120.72King 2007, 314.


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Although we do not go into the details of different types of inno-vation (product, process, etc.) in this article, the assessment can bebroadly supported by an analysis of patent data, as utilized by Hall andSoskice73 in their analysis of CME and LME innovation patterns. ECEperforms relatively poorly with regard to the number of patents whencompared to CMEs and LMEs (see Table 7), even when the shortcomings

of this broad indicator are taken into account.74

Moreover, the gap withregard to investments within the enlarged European Union seems tobe growing. For all countries in the region,Rand Dintensity declinedbetween 1990 and 2000.75This might also explain the fact that thenumber of patents in the region has actually decreased during the lastten years.

The absence of large numbers of (high-tech) patents does not meanthat there is no innovation activity undertaken in DMEs. Innovation inECEhas so far been predominantly imitative and not creative. Tech-nological activities in firms are skewed towards downstream nonana-lytical and non-Rand Dactivities like testing and standards.76This is

73

Hall and Soskice 2001b, 4144.74Taylor 2004; Crouch 2005, 2831.75OECD2002, 16.76Hgselius 2003, 22.

TABLE6

GROSSDOMESTICEXPENDITURES

ONRESEARCHANDDEVELOPMENTASA

PERCENTAGEOFGDP

Country 20002005 Average

DME

Czech Republic 1.3Hungary 0.9Poland 0.6Slovakia 0.6

LME

U.K. 1.8U.S. 2.7

CME

Austria 2.1Germany 2.5

SOURCE:Eurostat, U.S. and U.K. figures for 20002004.


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690 WORLD POLITICS

reflected in the number of high-tech patents that are registered in theregion (see Table 8). There is a big gap betweenECEeconomies andboth LMEs and CMEs.

Again, this is not to say that there is no innovation whatsoever inECEor that the region produces outdated products. On the contrary,the comparative advantage of the region rests upon its ability to quicklyadapt to new trends in the production of qualitative durable consumergoods. Yet most of the new trends come from outside the region; theexisting innovation in ECEis rather limited in scale and is conducted bya number of small companies that are active suppliers and final produc-ers for the major transnational companies. Whereas the TNCsdeliverthe technology to subsidiaries, the subsidiaries in return are widely con-nected, partly through ownership ties, to their national suppliers. Thisleads to a rather stable relationship between these firms.77The trans-national corporations are on the top of the institutional hierarchy, thenational suppliers are highly dependent on the TNCs for the continu-ation of their work,78and the practices brought into the region by the

TNCs are subsequently introduced by domestically owned corporations.77Czaban and Henderson 2003, 185.78Pavlinek 2004.

TABLE7

TRIADICPATENTSaPERMILLIONINHABITANTS

Country 1990 2000

DME

Czech Republic 0.71 0.60Hungary 2.69 1.62Poland 0.14 0.16Slovak Republic n.a. 0.02

LME

U.K. 25.26 16.78U.S. 44.57 n.a.

CME

Austria 22.52 26.61Germany (including ex-GDR

from 1991)

51.74 53.79

SOURCE:Eurostat, patent statistics. aTriadic patents are patents acknowledged by U.S., EU, andJapanese patent organizations.


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This fits the general picture that foreign direct investment is not onlyimportant in regards to ownership issues, but also to the regions wholeinstitutional setup.

COMPARATIVEADVANTAGESANDECONOMICPERFORMANCE

Although the limited large-scale innovation capacity ofDME

s may beworrisome in the long run, for the time being, the specialization of ECEhas allowed for substantial growth in the region. This is reflected by thecomparative advantages of the ECEstates that are situated in the assem-bly and production of relatively complex and durable consumer goods.Poland, for example, has undergone a remarkable shift with regard toits export structure, moving from agricultural products and industrialmaterials to consumer goods such as vehicles and vehicle parts.79ECEcountries are now increasingly specialized in labor-intensive exportindustries, such as medium-quality cars, machinery, electronics, andelectrical products. As Table 4 demonstrates, these sectors are predomi-nantly foreign owned. They can be considered complex when it comes

to the worker skills involved, but the intensity in physical capital varies79King and Sznajder 2006, 779.

TABLE8

HIGH-TECHPATENTSPERMILLIONINHABITANTS

GRANTEDBYTHEUSPTOa

Country 1990 2000

DME

Czech Republic 0.097 0.178Hungary 0.193 1.139Poland 0.013 0.039Slovak Republic n.a. n.a.

LME

U.K. 7.156 11.305U.S. 34.493 n.a.

CME

Germany (including ex-GDR

from 1991)

7.093 15.75

Austria 1.814 8.292

SOURCE:Eurostat, patent statistics. a

USPTOpatents are patents that are registered at the U.S. patentorganization.


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692 WORLD POLITICS

from heavy (i.e., cars) to light (i.e., electrical products and electronics).80The comparative advantage of the region in component manufactur-ing and assembly for diverse industrial goods primarily stems from theavailability of cheap, but skilled labor.81In this respect, ECEhas become

what John Pickles et al.82call a global assembly platforma regionwhere technical products are put together before they are exported(mostly) to more advanced economies. After the collapse of state so-cialism and the subsequent deindustrialization, the region special-ized in the reexport of high-tech consumer goods. For this particulartype of activity, no major research and development in the region isnecessary.

In order to assess the overall economic performance of the emergingDMEmodel, it must be compared with countries in a similar position,i.e., postsocialist European states. Measured in terms of GDPper capita

development, the four majorECE

statesthe Czech Republic, Hun-gary, Poland, and Slovakiaare among the best performing countries(see Table 9).83A rare exception in the cluster of postsocialist states isSlovenia, which emulates the CMEmodel and also has a high GDPpercapita.84

While the ECEstates have outperformed former CIS states such asRussia and Ukraine in terms of GDPper capita development, their supe-rior economic performance (particularly that of Slovakia) becomes mostobvious when compared with Bulgaria or Romania. The DMEmodel ofSlovakia has been much more successful than the rather incoherentcocktail capitalism85of Romania. This superior performance is alsoexemplified by the export share of complex, human-capital intensive

industries; from 1996 to 2005 it rose in Solvakia from 41 percent to 51percent while it decreased in Bulgaria from 31 percent to 23. Slovakiaalso reports rapid development in high-tech exports from 2003 on. Incontrast, the Bulgarian export structure has been relatively stable forthe last five years, with some increase in heavy basic exports. Although

80Greskovits 2005.81Czaban and Henderson 2003, 182.82Pickles et al. 2006.83In line with other comparative evaluations of the economic performance of specific varieties of

capitalism such as Hall and Gingrich (2004) as well as Kenworthy (2006), we are using data on GDPgrowth. The utilization of patent data by Hall and Soskice (2001a and b) has been severely criticized(Taylor 2004). Moreover, it would be misleading to use patent data as performance indicators for DMEssince they, by definition, rely less on this type of innovation activity than on CMEs and LMEs. Still, we

agree with Kenworthy (2006, 86) that aggregate analyses, e.g., based on GDPdata, have limited meritsin testing causal hypotheses on economic performance.84Feldmann 2006.85Cernat 2004.


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the current differences between ECEand the Baltics in terms of GDPdevelopment are far less obvious, the long-term prospects for sustain-

able economic development are brighter for the ECEstates, given thatthey have specialized in complex exports and not in exporting workedprimary goods such as wood manufacturing. The Baltics might still becaught in a postsocialist developmental trap that hinders structuraleconomic development.86

CONCLUSIONANDRESEARCHPERSPECTIVES

We have identified an economic model in East Central Europe thatis stable and fairly successfulparticularly when compared with mostother transition economies. For the time being, this model leads tocomparative advantages of parts of ECEeconomies in sectors such as

86Greskovits 2005.

TABLE9

GROSSNATIONALINCOMEPERCAPITALPURCHASINGPOWERPARITY

Country 1995 2001 2007 East Central Europe

Czech Republic 12,820a 15,640 22,020Hungary 12,830 12,830 17,210Poland 7,330 10,880 15,330Slovak Republic 8,380 11,900 19,340

Baltics

Estonia 6,320 10,160 19,810Latvia 5,080 8,550 16,890Lithuania 6,040 9,050 17,180

South East Europe

Bulgaria 5,480 6,690 11,180Romania 5,860 6,620 10,980Slovenia 12,910 18,150 26,640

Commonwealth of Independent States

Russian Federation 6,360 8,130 14,400Ukraine 3,160 3,630 6,810

SOURCE:World Development Index, Quick QueryaAll figures represent U.S. dollars.


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694 WORLD POLITICS

automobiles and consumer electronics. The comparative advantages ofthe economies can be explained by looking at the complementaritiesbetween the different institutions within these capitalist systems. Takentogether, these institutions form a rather coherent, stable whole. At thesame time it becomes clear that these institutional complementaritiesdo not fit the coordinated market economy or the liberal market econ-omy models and it does not make sense to describe ECEas epitomizinga mixture of CME and LMEelements. The latter not only ignores thefundamental argument of the VOCapproach (institutional complemen-tarities), but also leads to the identification of superficial similaritiesthat do not cover the basic functions of ECEcapitalism. Instead, we haveconstructed a third variety, based on the original categories supplied bythe VOCapproach. We have baptized this variety the dependent marketeconomy since its overriding feature is the fundamental dependence

on investment decisions byTNC

s. Thus, the hierarchy betweenTNC

headquarters and local subsidiaries replaces markets (LME) and associa-tions (CME) as a typical coordination mechanism within these econo-mies. Subsequently, we have identified a number of complementaritiesbetween these corporate governance features and the other major insti-tutions of DMEs.

This perspective opens a range of avenues for further research in-cluding the need to combine it with a more political account of theemergence of these institutions. Conceptualizing the economies of ECEas dependent market economies raises the question as to whether thesefindings may also be applied to other semiperipheral regions withinthe contemporary world economy, such as parts of Latin America or

South East Asia. This comparison would lead to a more systematicempirical test of our argument and would clarify the role of the timingof integration into the capitalist world economy in the evolution ofDMEs. Arguably, this timing has heavily contributed to the extraordi-narily dependent character of the ECEeconomies (when compared toother regions of the semiperiphery), given the weakness of domesticbourgeoisies after the demise of communism. Therefore theECEregionis perfectly suited as an empirical illustration of the development of aDMEideal type, as are Germany and the U.S., respectively, in cases ofCMEand LME.However, the specific heritage of the recent transitionfrom communism makes it difficult to test ECEs economic performanceagainst less pure cases of DMEin other world regions; according to VOC

logic, DMEperformance should be superior.A second comparative perspective instigated by our theoretical de-velopment concerns the ongoing graduation of former semiperipheral


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economies, such as Ireland, into the core of the world economy. Thesecountries have experienced sustained economic growth in the contextof a prominent role for foreign TNCs. Will this graduation be possiblefor ECEas well? Given the extraordinarily high degree of external de-pendency in DMEs, our findings indicate a somewhat skeptical perspec-tive.87On the one side, the extreme situation in ECEleads to particularrisks, as indicated by the case of Poland (and made more obvious by therecent subprime crisis):

While some of the smaller European economies are probably similarly depen-dent, it seems possible that Poland may have a greater reliance on TNCs for tech-nology transfer It also seems that even more of the commanding heightsof the Central Eastern European economiesbanking, telecom, utilities, andhigh-tech manufacturingare foreign owned Polish growth has become ex-tremely dependent on imported industrial goods, foreign markets, and the in-

vestment decisions of foreign-owned firms and banks. It is therefore extremelysensitive to exchange-rate fluctuations and changes in external demand.88

Western owners of eastern production sites may well have a certaininterest in the short- and medium-term viability of their investments inDMEs, but they have less incentive than domestic bourgeoisies to investin the long-term sustainability of these economies. Instead, Westernowners might relocate their production sites further to the east, drivenby the competitive pressures of financial capitalism. At the same time,the current comparative advantages of ECEmay gradually be eroded,given the decreasing value of the skill heritage acquired during com-munism and the absence of substantial investment into R and Dandeducation that have been so crucial for the Irish case.89Correspond-ingly, the movement of DMEs towards CMEor LMEstatus does not looklikely and the stability of DMEs might even be slowly undermined inthe very long run.

A third comparative perspective, however, stemming from the in-stitutional features of many economies of the former Soviet Unionstatesin particular their high degree of rent-seeking activitiescouldlead to the conclusion that there may still be limitations to the east-

ward relocation drive. These economies are marked by the prominentrole of informal patronage networks and the overriding role of controlover the access to raw goodstheir most important economic assets.It is difficult to imagine that they could offer the same institutional

87See also Brcz 2004, 69.88King and Sznajder 2006, 790.89Keating 2006.


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696 WORLD POLITICS

complementarities that support the competitive position of the ECEeconomies, in spite of their considerable economic growth. In the logicof our argument one may therefore assume the existence of at least afourth basic variety of capitalismbased on clansas a fourth basicmode of social coordination90and dominating the global periphery ofCentral Asia91and sub-Saharan Africa.

Of course, not all economies have to be institutionally coherent. Onemight be tempted to use the variety of capitalism approach as the ba-sis for a theory of underdevelopment, explaining it by the absence ofsufficient institutional complementarities. This theory would suggestseeking equilibrium in domestic systems and strongly advise againstbenchmarking best institutions across countries.92 In particular, thetransfer of individual institutions from one variety to another has rarelyproven successful, as numerous attempts to export the German system

of apprenticeships have demonstrated. Moreover, studies exploring theorigin of vocational training institutions indicate that the institutional-ization of a stable system of firm-based training relies on very specificclass settlements.93Correspondingly, the usefulness of the VOCtheoryfor the design of development strategies might be somewhat limited,given the considerable difficulties of creating these complex institutionsand linkages by policy design.

In any case, the policy conclusions from our investigation are quiteambivalent. The most immediate implication from our assessment

would be for the ECEeconomies to substantially invest in education,training, and research in order to stabilize their current comparative ad-

vantages against the relocation of production and to attract new invest-

ments. But doubt may still be raised as to whether stabilization of thecurrent position in the world economy is really desirable, given that fewcountries would explicitly choose an export-oriented development path

with a medium level of technology under the domination of foreigncapital.94Moreover, only part of the society benefits from the success ofthe externally dominated industries. While the DMEmodel has provento be fairly coherent and successful for certain sectors, it clearly fails tolift the standard of living of the whole population. Instead, we observea growing dualism within these societies with rising income disparitiesbetween those who participate in the export-oriented industries and

90Ouchi 1980.91Patrimonial postcommunist capitalism, see King 2007, 309.92Hpner 2005, 334.93Thelen 2004.94We owe this point to an anonymous reviewer.


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those who are excluded or who have to bear the costs incurred by thegenerous incentives offered by governments to attract FDI.95Most re-cently, this uneven development has led to increasing political and socialtensions in East Central Europe, accompanied by the rise of populism.

While massive FDIhas undoubtedly contributed to the modernizationof East Central European industries, its broader societal implicationsmay be more ambivalent.

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Enlarging the Varieties of Capitalism